WASHINGTON - The Washington Metropolitan Area Transit Authority sought court action yesterday to prevent it from having to make a $43 million termination payment on a sale-leaseback deal guaranteed by American International Group Inc. Meanwhile, House committee leaders pushed for federal assistance for more than 30 of the nation's largest transit agencies "at risk of default and financial collapse" because of similar deals.
WMATA filed a request for a temporary restraining order against KBC Bank NV of Belgium and Wilmington Trust Co. in the U.S. District Court in the District of Columbia, after KBC Bank demanded their termination payment by the end of this week. The sale-leaseback deal was closed in September 2002 and financed 36 rail cars, but it technically defaulted after AIG lost its triple-A rating.
"If Metro is unsuccessful in getting a judge to grant a temporary restraining order, the agency could find itself in default Friday," said Candace Smith, a WMATA spokeswoman. "The one [option] that we're hoping for [and] the simplest, low-cost option, is still for Treasury to stand in the shoes of AIG."
Smith added that Treasury officials "know our time frame; they know that we have a deadline of Friday."
"I am confident the federal government and Treasury Department will look at this issue and take action to insure transit agencies across the country are not stripped of their ability to provide essential services," WMATA general manager John Catoe said in a release.
House Transportation Committee chairman James Oberstar, D-Minn., and ranking minority member John L. Mica, R.-Fla., emphasized the urgent need for the Treasury and Federal Reserve to step in to prevent these defaults in a letter sent to Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke.
"These defaults - if processed - could cost some of the nation's largest transit agencies hundreds of millions of dollars, and could threaten their very existence, and the financial stability of the state and local governments that fund them," they warned, adding the public transit sector's total exposure to these sale-leaseback deals may be as high as $16 billion.
"We expect that as you confront this unprecedented situation, you recognize the severity of the financial impact on state and local transit agencies," the letter said. "We urge you to use all of your existing authority, including the Department of Treasury's authority under the Emergency Economic Stimulus Act, to help the transit agencies resolve this issue ... especially in light of the fact that AIG has been the recipient of considerable assistance from the Treasury."
Oberstar and Mica said investor banks are in position to be able to demand payments from the transit agencies because the IRS designated these deals as abusive tax shelters and then recently settled tax law charges with 30 companies by getting them to reduce the tax breaks that they received from these transactions by 80%.
"Unfortunately, in the event of a default, the investors have an opportunity to recover a penalty from the transit agency equal to the cash rents plus a cash amount reflective of anticipated tax benefits," they told the federal officials. This has "provided investors, blocked by the IRS from receiving tax benefits, an opportunity to recover anticipated profits at the expense of public transit agencies."
Meanwhile, representatives of WMATA and other transit agencies said yesterday they are continuing discussions with Treasury officials on possible federal assistance, which they contend is needed because AIG lost its triple-A rating, triggering technical defaults of the leaseback deals, which could result in agencies immediately owing up to $4 billion of termination payments to investors.
New Jersey Transportation Commissioner Kris Kolluri said the New Jersey Transit Authority faces a potential $150 million of exposure on leaseback deals.
Congressional sources were mixed about results of a meeting between transit and Treasury officials Tuesday. Some were optimistic that Treasury would step in to assist transit agencies while others were worried the department officials did not commit to helping.
"They didn't slam the door, but they didn't do anything," said one pessimistic source who was briefed on the meeting but did not attend. "It was like being in a room with bureaucrats where they listen and they nod and they wait until you finish and then you go and nothing's different after your visit."
But another Capitol Hill source said that the meeting appeared "to get the ball rolling."
The meeting was attended by Treasury assistant secretary for economy policy Phillip Swagel, Treasury assistant secretary for tax policy Eric Solomon, and WMATA chief financial officer Carol Kissal, and included via conference call officials from NJTransit and staff of New Jersey Sen. Robert Menendez.
Kolluri, who was not at the meeting, said: "Sen. Menendez wanted to know - since AIG is being backed by the taxpayers by keeping it afloat - 'Is there a way to keep their credit rating, as far as these transactions are concerned, secured?' So that's sort of the solution we're hoping for, because this is a scenario that we could certainly live without right now."
Andrew Ackerman and Michelle Kaske contributed to this story.
